As a freelancer you owe two types of tax: self-employment tax (15.3% of net profit) and income tax (based on your tax bracket). On $60,000 of net freelance income: self-employment tax = $9,180, federal income tax = approximately $6,000-$9,000 depending on deductions. Total tax burden: roughly 25-30% of net income. The formula to estimate what to save: multiply net freelance income by 0.30 and set it aside. Pay quarterly estimated taxes to avoid penalties. You can deduct business expenses to reduce taxable income.

The IRS uses several factors to determine worker classification. Employees: employer controls how and when they work, provides equipment, sets the schedule. Employer withholds taxes and pays half of FICA. Independent contractors: control their own process, can work for multiple clients, use their own equipment. Pay all taxes themselves. Misclassifying employees as contractors is illegal. If you believe you've been misclassified, you can file IRS Form SS-8. Misclassified workers can recover back taxes, wages, and benefits.

Freelancers can deduct: home office (exclusive use space — calculate percentage of home square footage), equipment and software, internet and phone (business use percentage), professional development courses and books, health insurance premiums (100% deductible if self-employed), retirement contributions (SEP-IRA allows up to 25% of net income), business travel, client meals (50%), professional memberships, subscriptions, and tools. The qualified business income (QBI) deduction may also allow you to deduct up to 20% of net self-employment income. Keep organized records with receipts for everything.

You do not need an LLC to freelance — you can operate as a sole proprietor. However an LLC offers important benefits: personal liability protection (if a client sues you, they can't take your personal assets), professional credibility, ability to open a business bank account easily, and potential tax benefits. An LLC costs $50-$500 to form depending on your state (California is $70 filing fee + $800/year minimum franchise tax — one of the most expensive). For most freelancers earning under $50,000/year, a sole proprietorship is fine. Once you have significant assets to protect, form the LLC.

A SEP-IRA (Simplified Employee Pension IRA) is a retirement account for self-employed people. You can contribute up to 25% of net self-employment income, up to $69,000 in 2024. Contributions are tax-deductible, reducing your taxable income significantly. Example: $80,000 net freelance income, contribute $20,000 to SEP-IRA, pay taxes on only $60,000. Combined with the QBI deduction this can dramatically reduce your tax bill. SEP-IRAs are easy to open (most brokerages offer them), have no annual fees, and you can skip contributions in lean years.